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At the beginning of June, VanEck brought investors together with an impressive roster of corporate CEOs in the natural resources space at the fourth annual VanEck Natural Resources Conference. Asked to describe their companies’ activities under three different headers, these business leaders then explained how they Innovate, Navigate and Differentiate to lead in today’s world. (A description of the event, together with a list of all speakers, can be found here.)
We believe that some of the main takeaways (with illustrative examples) were the following:
While technological development remains a significant component and has accelerated growth in numerous ways, innovation should be view more broadly. From the implementation of progressive business models that create value independent of commodity prices or the movement to fully automated operational sites that are safer, efficient and, ultimately, more profitable, innovation has permeated every aspect of natural resource companies as the industry has evolved from production-driven to return-focused.
While Nicholas Deluliis, President and CEO of natural gas company CNX Resources Corporation, accepted that the approaches his company’s business plan takes are not new, having been borrowed from other players in other sectors, they are certainly innovative in the energy space. For Mr. Deluliis, the name of the game is to drive the long-term intrinsic per share value of the company for its ownership. Describing himself as being agnostic to gas prices, this is solved through capital allocation across three big opportunities: 1) investment into the company’s asset (drill) base—with cash being king; 2) reducing debt and strengthening the balance sheet; and, finally, 3) returning capital to shareholders through share buybacks/count reduction.
For Anthony Petrello, CEO of oil and gas drilling company Nabors Industries Ltd., with value-added service mattering more than daily rig rates, automation, robotics and data collection are essential not only for ensuring repeatability of performance and consistency of workflow, but also for securing future profitability.
In the mining industry, the excitement around the potential for automation, especially when it comes to trucks, was palpable. Both Ron Millos, SVP Finance and CFO of mining company Teck Resources Limited and Mark Bristow, President and CEO of gold supermajor Barrick Gold Corporation, talked of the technological advances that continue to be made. These include narrower roads and steeper pit walls at mines, and autonomous haul trucks that can operate alongside ones driven by humans, safety, efficiency and costs all benefiting.
Companies across natural resources continue to prioritize the role of shareholders in their strategic decisions. While finding ways to create value for shareholders through growth initiatives remains crucial, the return of capital (ROC) to shareholders represents a clear paradigm shift for these sectors.
As we have mentioned, Mr. Deluliis of CNX sees the return of capital to shareholders as one of his three big opportunities to drive long-term intrinsic per share value. When asked why he uses share buybacks rather than dividends, Mr. Deluliis provided three reasons why he believes share buybacks are preferable to dividends: 1) a share buyback is a very discrete, singular, rate of return decision on behalf of ownership. Buybacks also benefit the remaining shareholders who want to retain their investment; 2) in a buyback, individual investors are allowed to make their own, discrete decision. This contrasts with dividends, which go to all shareholders; and 3) being in a commodity business, buybacks can be more opportunistic. There is a flexibility that is lacking with dividends, which may be predicated on a degree of “continuity”.
As always, though, there are exceptions that prove the rule. One of these was Royal Gold, Inc., whose President and CEO, Tony Jensen, opened the conference. (Royal Gold, rather than being a gold mining company, acquires and manages precious metals royalties and streams.) It, on the other hand, has rewarded shareholders with ROC by way of dividends. And, for the company, continuity really has been the name of the game. As Mr. Jensen happily showed us, in addition to being set at a sustainable level, dividends per share between 2001 and 2019 still grew at a compound annual rate of 18%—surely a record to be envied.
Historically, growth at any cost drove companies in natural resources. But today, among a wave of M&A transactions, consolidation and the acquisition of assets need to make sense for the bottom line. Efficiencies, cost reductions and free cash generation now take precedence over size.
Royal Gold, once again, serves as an excellent example in this respect. Mr. Jensen explained with quiet persuasion that, as the third largest company of this type, his goal is not to increase assets to become the biggest royalty firm. It is, rather, to be the most profitable and the most valuable for shareholders. With only 23 employees, the company relies on technical expertise, continuous due diligence and the desire to be financially healthy so that it can be considered not just by those interested in exposure to gold, but also by general investors.
When it comes to the benefits of efficiency, cost reduction and cash flow generation, the example of Barrick is hard to beat. In a riveting and highly entertaining discussion with Joe Foster, Portfolio Manager and Strategist for VanEck’s gold strategies, Dr. Bristow took us through the company’s narrative over the past several months, vividly illustrating the importance not only of the “top line”—the quality of the ore body—but also the bottom line, profitability.
In the current environment, companies no longer have years in which to implement their strategies to distinguish themselves from peers. An innovative, dynamic and flexible management philosophy can provide natural resources firms with the ability to adapt to changing market conditions, wavering investor sentiment and heightened geopolitical tensions.
With Dale Redman’s descriptions of the various ways in which ProPetro Holding Corp., the oilfield services company of which he is CEO, differentiates itself from its competitors, we were left in no doubt as to: 1) the importance of employing the right people; and, 2) the importance of truly delivering on customer services. Neither of these is possible without a flexible, innovative and dynamic management philosophy. Mr. Redman also noted the importance of the ability of the financial side of the business to engage with the operational side—on a continuing basis. This ability appears not, perhaps, to be much in evidence elsewhere in the oilfield services sector.
The benefit of a flexible and dynamic management philosophy was also amply demonstrated, in a completely different context, by Nabors’ actions to address some of the governance issues it faced in the past. As Shawn Reynolds, Portfolio Manager of VanEck’s hard assets strategies, described it, the company “attacked … straight on.” Nabors was, subsequently, one of the first to come out with a lead independent director, and it made the effort actively to go out to meet with shareholders, which it did, in order to gain clarity on shareholders’ imperatives.
The era of excessive spending, bloated balance sheets and carelessness is over. Natural resources companies are financially healthy, disciplined in their objective of creating shareholder value, cognizant of stakeholder needs and mindful of the environmental and social impact of their operations.
Illustrating the importance ascribed by the company to environmental, social and governance (ESG) considerations was the list provided by Mr. Millos of a number of Teck’s ESG ratings: they were impressive, to say the least. As Mr. Millos described it, you need to be a good corporate citizen, be good to the environment and provide opportunities for the communities in and with which you work. You just have to do a good job or you will be on the receiving end of a beating! With water being a case in point, Teck reuses it three times. In his industry, as Mr. Deluliis of CNX pointed out, not only has natural gas helped the U.S. decarbonize massively, on a more local level, it has also helped resurrect the Appalachian region.
As we reflect on our fourth Natural Resources Conference, it is important to put the takeaways above in context of what has occurred over the last several years. Looking back on the themes of our previous conferences, a compelling narrative begins to develop. This narrative is interesting not only from a natural resources perspective, but, taking a step back, also reveals a true philosophical transformation that is rare, particularly when it is of such magnitude and takes place over such a short period of time.
Diving deeper, the theme of our first conference was “Surviving and Thriving,” and that of the following year’s “Reshaped Companies. Revitalized Sectors.” Last year’s theme (that of our third conference) was “The Best ROC Wins.” So, over the span of four years, the discussion has evolved from talking literally about the mere existence of companies to today’s environment where leading companies are innovating and differentiating themselves by acknowledging the importance of shareholders.
This transformation is why all of us at VanEck (especially with natural resources being a core focal point of our history and growing capabilities) are excited to be able to share with clients our access to CEOs so we can all gather, together, insights both on how we got here and what may be in store for all of us in the next chapter of the natural resources story.
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